Академический Документы
Профессиональный Документы
Культура Документы
by
Kelly Bourgeois
June 2003
Kelly Bourgeois, 2003
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Table of Contents
Preface
Purpose 1
Historical Background 2
Significance 7
Assumptions 8
Accounting Methods 9
Balance Sheet 19
Operating Statement 24
Budgets 28
Conclusion 35
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Purpose
The purpose of this capstone project is to describe and analyze the significance of
summarizing material acquired from three capstone courses taken in the Arts and
financial statements for nonprofit financial management. The significance of this capstone
project will be that it provides an analysis of the importance of financial data that is
Historical Background
that during the colonial period “…neither philanthropy nor voluntary associations existed
then in a recognizably modern form” (1994, p.4). Still, colonists supported charitable
purposes, with the majority of the money given though donations to public institutions.
(Hobkin,1994) “Only in the mid-eighteenth century did the political, economic, and legal
entities and thus encouraged and supported such contributions. This interpretation of the
Constitution encouraged the idea that people had a private responsibility to support the
public good.
In 1874, Charles Eliot defended tax exemption of public institutions and broadened
the scope of tax-exempt organizations. His arguments also helped increase the size of
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because of these new regulations. Charitable trusts, community chests, and foundations
emerged during the late 19th century and “would substitute for equality of condition,
equality of opportunity and, suffused with an ethos of service, would invest social,
economic, and political life with a sense of common purpose” (Hobkin, p.17). The number
World War I demonstrated the importance of private support of the public good
fundraising and created partnerships between public entities such as the Red Cross and
private businessmen such as Herbert Hoover (Hobkin, p.17). Hoover’s efforts were based
Businesses and wealthy citizens now had major incentives to give to organizations.
Nevertheless, as Salamon points out,“ The Great Depression of the 1930s made clear…that
private and localized system of aid, however well intentioned, was not capable of providing
on its own the protections that an urban- industrial society required” (Salamon, p.58). The
p.58). Although these programs represented major steps to providing aid to all citizens,
they fell short of intended goals and were characterized by “patchy coverage, limited
funding, local and state government dominance, and educational salience” (Salamon, p.59).
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During the 1930’s changes in economic philosophy, taxes and budgeting practices,
foreign policy, legal doctrines, and demographic factors intersected to create a distinctively
American version of the welfare state (Hobkin, 1994, p.19). “Keynesian economic theory
pointed to the ways in which taxing, spending, and borrowing could be used to influence
the economic activities from which the government drew its revenues” (Hobkin, p.19) and
Beginning in the 1940’s with the governmental system unable to provide universal
assistance because of World War II, the general public turned to nonprofits to play a
significant role in the public social welfare system. Legislation passed in 1943 made
income taxation universal and created more incentives for the public to give to charitable
organizations. (Hobkin, p.19). The government played a role in funding the growth of
to charitable organizations. The government also provided grants and contracts that
The “Great Society” of the 1960’s made major strides in social reform including:
employment training for the disadvantaged; Medicare, a national health insurance plan for
the elderly; Medicaid, health care for the poor; networks of education programs in low-
income neighborhoods; and a cost-of- living adjustment added to the Social Security
program (Salamon, p.61). In addition, Congress established the National Endowment for
the Arts and the National Endowment for the Humanities in 1965. The evolution of the
pensions and health thereafter little aid was provided for low- income people or the poor.
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During the 1970’s, the continued pattern of patchy coverage still forced the
government to look towards the nonprofit sector to provide social services for the general
through various applicable programs such as Medicare, research grants, and local and state
government monies.
This growth period was cut short in the 1980’s with a new administration that cut
education, income assistance, and social service programs and moved social program
money into health care, housing, and pension plans. The purpose of this shift in funding
was to encourage the growth of nonprofits in areas that had been supported by the
government. It actually refocused social services on the middle-class and encouraged for-
provide services through into the 1990’s through increased health care costs and a boosted
government agencies while facing increased competition from for-profit entities. As the
history of nonprofits demonstrates, providing social services for the general public will
continually be affected by government policies and the demand for services from the
general public. Increased demand with increased competition will force nonprofits to seek
(1994), Regina Herzlinger and Denis Nitterhouse state: “The size of the private nonprofit
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sector has been pegged at 970,000 nonprofit organizations, with 7.4 million employees and
contributions of $104 billion” (p.1). The competition for funds from governmental
agencies and foundations has necessitated clarity and consistency in financial statements
not to make a profit, and (2) not to benefit individuals as owners, but to advance the
welfare of society” (p.3). In short, the principle purpose of a nonprofit is to realize its
mission of public service. It must do this within ethical and accountable financial
the state, and the Internal Revenue Service (IRS). Primarily the organization must produce
three important annual financial statements: the statement of financial position (balance
sheet), the statement of activities (operating statement), and the statement of cash flow.
Together, these reports, along with an evaluation by the chief executive officer, reflect the
organization’s financial condition on a particular date. The balance sheet shows the assets
versus the liabilities of the organization and documents the organization’s net assets (or
what the organization has left after you subtract the liabilities from the assets). At a
minimum, the balance sheet must break down the net assets into unrestricted, temporarily
financial activities over a period of time. The income statement addresses how the
organization’s net assets, of three categories mentioned above, have changed and whether
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there were times when one net asset class moved in relation to another. As Thomas Wolf
argues in Managing a Nonprofit in the Twenty-First Century, “Armed with the income
made any unusually large expenditures, or had any revenue windfalls” (1999, p.215).
Finally, the statement of cash flows reports how the organization’s cash position
changed during the year. In essence, the statement of cash flows provides information
about cash receipts and cash disbursements of the organization (Hummel, p.78).
The three financial statements are used together to project and analyze the fiscal
provide these financial statements to address questions about their financial activities. The
financial statements may also be used to compile a formal audited statement, prepared by a
indicated through the financial statements, future improvements that could be made to
increase financial stability using budgets, and the vital that role the three documents play in
sheet is the reporting of the organization’s equity. Equity derives from the nonprofit’s
generated earnings from its operations compared to what the organizations owes (Thomas,
1994, p.405). Earnings retained are recorded as net assets or fund balance. In general, the
more net assets an organization has retained the greater the organization’s net worth
(Cumfer, C.& Sohl, K., 2001, p.519). This paper will analyze issues arising from
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organization’s negative or positive net worth. The analysis will also provide information on
fund accounting or the breakdown of net assets into unrestricted net assets, permanently
restricted net assets, and temporarily restricted assets. The analysis of the income statement
will discuss the ratio of expenses during a given period of time to the projected or budgeted
expenses during the same period of time. As argued by John C. Thomas in The Jossey-
Bass Handbook of Nonprofit Leadership and Management, the income statement “explains
the change in operating equity between two balance sheets”(1994, p.406). This information
expenses incurred have affected the organization as a whole. Analysis of the cash flow
An organization can determine if net income and net assets are accurate at the end
of the year by analyzing the statement of cash flow to determine if there are any unpaid
expenses or if revenue will be generated at a later date. In addition, by analyzing the unpaid
expenses, an organization can budget appropriately for the given financial period (Olenick,
Significance
“Increasingly, funders, government bodies, and various auditing agents are requiring that
organizations dependent on federal and state governments are required to have financial
verification and established accounting procedures to receive monies from such agencies
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are also affected by consistent, detailed record keeping of financial statements that indicate
the costs of services and programs provided by an organization. Through cost analysis,
nonprofits can make plans to provide more effective services and programs, or conversely,
decide to cut services and programs because of the costs involved. In essence, good
financial record keeping affects not only the internal aspects of the organization but also
external partnerships.
hindered by the public perception of inadequate and unreliable quantitative and qualitative
generally lack meaningful bases for demonstrating the value of what they do” (p.174). One
way to provide reliable and adequate data is through the three detailed financial statements
described above.
The key questions that this paper will address through information provided by the
three capstone courses and literature review are: What are the fundamental financial
statements? What elements compose these statements? How does one analyze information
Assumptions
organization.
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§ The cash flow, income, and balance sheet are three key financial statements of a
nonprofit organization.
§ Financial statements are utilized to complete grant applications, state and federal
forms.
§ Nonprofits will continue to develop and use financial statements to facilitate the
§ Nonprofit managers will follow accounting principles and have high ethical
standards.
Accounting Methods
There are three types of major accounting methods for nonprofits: cash basis
accounting, accrual-based, and a modified cash accounting system (Dreezen, C. & Korza,
P., 1998, p.246). To determine which accounting method is used by a nonprofit, the
organization must first choose to show when revenues or expenses will be recorded and
then determine which system will reflect the financial condition of the organization in a
Most people are familiar with cash basis accounting because it is synonymous with
their own checking and savings account. When following a cash basis accounting system
“financial transactions are recorded only when cash changes hands” (Wolf, 1990, p.170).
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As Thomas Wolf explains: “When a person receives money and deposits it in the bank, the
deposit is recorded as income and is added to the bank account balance. [Inversely], when
p.170). In cash basis accounting receivables and payables are not recorded. Although this
information because it tells nothing about what the organization may owe or is owed during
a given period of time. Arnold and Philip Olenick argue in A Nonprofit Organizations
Operating Manual (1991), “The only good argument for recording and reporting economic
events only when cash is immediately involved (cash basis) is its familiarity and
simplicity” (p.217).
accrual method is not as simplistic as cash basis accounting but it does “paint” a picture of
the overall financial health of the nonprofit. Accrual method accounting takes into account
“all committed income and expenses, whether or not they have been actually received or
paid, are entered in the books” (Dreeszen, C. & Korza, P., 1998, p.246). Most people are
familiar with the accrual method of accounting because it is synonymous with credit-card
transactions and payments. The system of recording not only what has been purchased and
paid for but also what is owed to the credit card company is a simplified version of accrual
accounting.
Grants are typically entered into the accrual system of accounting as income once a
confirmation of the grant is received. The organization may not actually have the money in
their account but will receive the money at a later date and therefore can record the grant as
income. On the other hand, expenses will be recorded in the same fashion as accounts
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payable and will reflect the actual amount owed at a given time and will include all
activities of the organization not just cash transactions. “The accrual basis classifies
revenues and expenses by taking into account not only the accounting period in which the
bill is paid, but more importantly, the period in which the activity involved occurred”
(Olenick, A. & Olenick, P., 1991, p. 219). With the accrual method specific revenues and
expenses are recognized as a current, accrued, or deferred revenue or expense. Arnold and
Philip Olenick have provided a synopsis of revenues and expenses and the classification
during the current period and the amount was all paid for in the current period.
3) Deferred revenue or prepaid expense, to the extent paid in advance during the
current period, where all or part of it will benefit a future period (1991, p.219).
revenue generated from this transaction is considered current revenue because the ticket is
used for tonight’s play. Therefore, the revenue and expense happened within the same
accounting period. Accrued revenue, on the other hand, might be dues or subscriptions
where the amounts remain uncollected after related services have been performed. Often
accrued revenue is linked to delinquent accounts, uncollected grants, and program service
fees for which the client has not paid for the service that have been performed. Finally, an
example of deferred revenue is when pledges, dues or subscriptions are received in advance
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and specified to be used during a future period. Pledges are accrued and deferred during
the period not in use and amortized over the period in which it applies.
this system, the books are kept on a cash basis except for a few accounts tha t are kept on
accrual and that are usually updated only at the end of the month or at financial reporting
time” (Wolf, 1991, p.171). Often the accrual accounts in the modified cash accounting are
use the modified cash basis of accounting to “rectify” their bookkeeping entries to reflect
that actual revenues and expenses of the organization and to create an opportunity to
whole and implement an accounting program suited to its individual needs. To do this an
organization must address five questions: What personnel are responsible for each duty?
What are the safety mechanisms in place for the organization’s resources? What approval
and authorization systems are needed or are in operation? What methods are available to
verify the safeguards? Does the organization have any insurance to cover losses? (Wolf,
1991, p. 174) (Olenick, A. & Olenick, P., 1991, p. 236-39) The organization must also look
at the size and scope of the organization’s activities. As Arnold and Philip Olenick argue,
“Different kinds of users differ in their level of expertise, knowledge, and understanding,
and in their specific information needs” (1991, p.216). Finally, an organization should
Choosing a type of accounting system for a nonprofit can be a difficult and vexing
task. A nonprofit must remember that if it chooses to use a modified or strictly cash basis
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accounting method that at least once a year the system must be modified to an accrual
method. (Wolf, 1991, p. 172) This modification must take place to reflect the financial
solvency of the entire organization and its activities. The accrual method is mandated by
the generally accepted accounting procedures or GAAP. As Thomas Wolf states, “It should
be obvious that knowing the financial condition of an organization is more revealing than
Each accounting method has advantages and disadvantages for its use by a
implementing and, if possible, administrating its accounts. In the end, the best system is a
system that gives the members of an organization control over its financial health and
portrays this health through their records. Craig Dreeszen and Pam Korza caution
“…picture yourself at audit time trying to explain how money was spent and where money
feasibly is accounted for through a variety of financial statements, primarily the balance
sheet, cash flow and operating statement. One of the principle differences in nonprofit
nonprofit is to realize its socially desirable goals and objectives for the community it
Nonprofits can only serve their goals and objectives if they have sufficient cash to
provide for various programs. This dependence upon cash flow has created a heavy
responsibility for nonprofits to account for the resources they have received. Nonprofit
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fund accounting has enabled organizations to segregate assets into categories by the
restrictions placed on their use. Dreeszen and Korza state, “Unlike the systems used by for-
profit corporations in which “owner equity” is shown, a nonprofit tax-exempt entity reports
a fund balance on its balance sheet” (1998, p.245). Other differences inc lude: fixed assets
chooses to collect them; and smaller nonprofits can choose to use the cash basis accounting
instead of the accrual method (Connors, 1993, p.789). These differences reflect the unique
nature of formulating financial statements for nonprofits and enable nonprofits to manage
When assessing the financial health of a nonprofit, the executive director and board are
responsible for overseeing that the organization’s financial records are maintained
completely and appropriately and clearly state what has happened during a given period of
time. Tracy Daniel Connors argues that financial statements should have five
characteristics:
1. They should be easily comprehensible so that any person taking the time to study
2. They should be concise so that the person studying them will not get lost in detail.
3. They should be all- inclusive in scope and should embrace all activities of the
organization. If there are two or three funds, the statements should clearly show the
relationship among the funds without a lot of confusing detail involving transfers
and appropriations.
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4. They should have a focal point for comparison so that a person reading them will
have some basis for making a judgment. In most instances, this will be a
comparison with a budget or with figures from the corresponding period of the
previous year.
5. They should be prepared on a timely basis. The longer the delay after the end of the
period, the longer the period before corrective action can be taken (1993, p.766).
possible. Miscellaneous or small line items should not be grouped together into a “slush”
account, which can cause confusion and mislead others when reviewing the statements.
A cash flow worksheet can aid an organization by reviewing what monetary inflows
and outflows the organization will sustain during a given period of time. Rather than
revenues and expenses a cash flow worksheet records line items as receipts and
disbursements. Specifically, the cash flow worksheet can help an organization determine
whether there is adequate cash available for an organization to meet its expenses during the
month. The difference between an annual budget and a cash flow worksheet is that the cash
budgeted in the worksheet addresses expenses that need to be met during a given month.
An annual budget is not concerned with the specific time of the expenses but rather the
will be a cash flow problem over several months. In the example of the ABC Nonprofit
Cash Flow Worksheet, October and November have a surplus of cash. However, by
projecting the cash flow of the organization over four months the organization can tell that
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it will sustain a deficit in December and January. In addition, the organization can spot
certain areas that are causing the deficit such as the loss of revenues from grants and the
increased expenses incurred in November for rent. These are just two examples of why
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A cash flow statement, simply put, enables a nonprofit to determine where it spent
its money and where the money came from. The cash flow statement reviews “(1) the net
effect of operations (revenues minus expenses), i.e. the operating surplus…(2) non-revenue
funds received, such as loans and advances; (3) non-expense items paid, such as payments
(4) changes in accounts receivable and accounts payable balances” (Olenick, A. & Olenick,
P., (1991), p. 372). The cash flow statement is different from an operating statement
because it reflects the cash situation of the organization in its entirety, whereas the
The cash flow statement, also called the Statement of Activity provides vital
Revenues and Expenses are measured by what is called the accrual concept.
According to this concept, revenues is recorded when it its earned, and expenses are
recorded when they are incurred. These are not necessarily the same as the amount
of cash received or paid out. Because of this, entities prepare a third statement—the
statement of cash flows (SCF)—that explains the reasons for cash changes. The
SCF classifies cash changes into three categories: operations, financing, and
investing (1994, p.406).
Cash flow statements can easily be prepared by analyzing the beginning balance
sheet with the ending bala nce sheet of a specific period. Subtracting the beginning balance
sheet from the ending balance sheet will indicate the changes in the balances for each
period or the cash flow for the organization. Cash or gifts of any kind with a restricted
purpose must be segregated from those that are general or unrestricted assets and
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Example of Cash Flow Statement for BookGood Nonprofit**
Cash Flows from Operating Activities. The area details the unrestricted and
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temporarily restricted cash inflows and outflows. The main body of the ABC Nonprofit
cash flow statement is an example of the direct method of accounting that restates the
temporarily and unrestricted income on a cash basis. The reconciliation at the bottom of
the figure is an example of the indirect method of accounting. This method begins with the
change in net assets from the Statement of Activities (Income Statement or Operating
Statement) and converts the amounts from the accrual method to cash basis accounting.
Most nonprofits will utilize the indirect format to depict the organization cash.
Cash Flows from Investing Activities. This area depicts the cash inflows and
Cash Flows from Financing Activities. This area depicts the organization’s cash
inflows and outflows from financing activities such as receipts and repayments to creditors
or donors. This area is for permanently restricted funds that have a set of requirements that
When and organization completes the three sections of the cash flow statement the
net increase/decrease in income explains how the cash has changed during the given period
Balance Sheet
documents a nonprofit can provide for use in its internal management. The balance sheet
establishes financial information to external entities. The balance sheet is often referred to
The balance sheet complements the cash flow statement because “the cash flow
statement tells us what funds we expect to have on hand to pay bills and other obligations
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as they come due. . . the balance sheet report[s]...its current financial situation” (Olenick,
A. & Olenick, P., 1991,p.352). In other words, the balance sheet describes what you own,
such as equipment and cash (assets), compared to what you owe, such as loans (liabilities).
“The accounting system for nonprofits is designed to capture the economic activities of the
firm and its financial position. The financial statements are constructed based on the
‘Accounting Equation’ in which: Assets = Liabilities + Net Assets” (1991, p.21). The
difference between the assets and the liabilities provides information on the organization’s
net assets.
Assets
o The organization’s fixed assets such as land, buildings, vehicles, furniture, and
equipment
o Investments
Liabilities
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o Payments (installments) for equipment
o Taxes payable
o Unearned revenue such as payments received for services that have not been
performed
o Other liabilities such as mortgages (Olenick, A. & Olenick, P., 1991, p. 353).
Once an organization has reviewed the items listed above, it can address several
solvent if the current assets are greater than the current liabilities. A good rule of thumb is
to maintain a current ratio of 2:1, assets to liabilities. If liabilities are greater than assets,
The second step in reviewing the balance sheet should be to look at the resources
owned by the organization. By reviewing its resources, management can determine if there
are any assets that could potentially be used to supplement the payment of maturing debts.
Finally, management should look at what the organization owes and determine
when these outstanding liabilities are due. The most common types of liabilities for an
organization come from accounts payable, grants payable, refundable advances, dues to
third parties, long-term debt, unrestricted assets, temporarily restricted assets, and
Year Year
Assets % Per Year* 2000% Per Year* 2001
Short Term Assets
Cash 24.4 $100,000.00 15.63 $ 75,000.00
Pledges Receivable 18.29 $75,000.00 10.42 $ 50,000.00
Prepaid Expenses 2.44 $10,000.00 1.04 $ 5,000.00
Long Term Assets
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Investments 12.19 $50,000.00 41.67 $ 200,000.00
Fixed Assets 42.6 $175,000.00 31.25 $ 150,000.00
Total Assets $410,000.00 $ 480,000.00
Cash. Liquid funds or funds such as U.S. Treasury bonds on deposit in the bank.
An audited financial statement requires that restricted cash (or any other asset) with a
donor- imposed restriction which limits its long-term use must be classified in a temporarily
Pledges or grants receivable. These are amounts that have been committed by an
outside or external donor to the organization. Pledges and grants should be recorded as the
amount the nonprofit expects to receive or the net realized value. Nonprofits should not
report the full or gross amount because the line item could be overstated.
Prepaid expenses. These are costs paid in advance for receiving goods, services, or
benefits for the organization. This type of asset will decline in value as the asset is
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Investments. The refers to valuation of the organization’s stocks and bonds. The
amount that should be recorded is the fair market value on the date that the financial
statements are prepared. However, on a tax return, this can the amount can be the historical
cost of the investments, the lower fair market value or historical cost, or the normal fair
Fixed assets. This category includes all property and equipment owned by the
organization. Fixed assets are generally not sold and the balance sheet does not reflect the
fair market value of the asset or the cost of replacing the items. Instead, the fixed asset line
item includes the net book value of the assets. The net book value is the historical cost of
the long-term assets less depreciation. In general, fixed assets depreciate year to year
because the organization must record a non-cash depreciation expense. This depreciation
often follows the straight- line method, which reduces the asset’s worth by equal annual
increments over the estimated life of the asset. (Keating, 2001, p.32)
Some nonprofits own works of art. Since these assets may not decline in value, a
nonprofit must record them as assets on the organization’s balance sheet. Nonprofits can
choose to capitalize their collections retroactively, and then depreciation need not be taken
because the asset will not be consumed over time. (Olenick, A. & Olenick, P., (1991), p.
352-56).
Accounts payable. This line item includes unpaid bills from vendors and creditors
for goods and services delivered. If specific items such as wages, taxes, and grants are
significantly large, they can be reported separately or integrated into this line item.
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Grants payable. These are grant amounts promised to individuals or other
organizations.
Refundable advances. This is also known as deferred revenue. Included in this line
item are grants received from donors that are not considered or recognized as revenue
Dues to third parties. These are dues transferred to a third party through another
as a transfer agent collecting contributions from one group and disbursing the funds to a
third party. The intermediary party has no power to change the recipient of the funds, so
Long term debt. This is the principal and interest owed to a creditor. Examples of
long-term debt are bank loans, publicly traded bonds, or privately arranged debt financing.
Temporarily restricted. These are funds that are limited by donor stipulations.
These stipulations can either be met by the actions of the organization or expire over time.
Permanently restricted. These funds are similar to temporarily restricted funds, but
the donor stipulations do not expire over time or by the actions of an organization. An
of the endowment must remain intact into perpetuity (Keating, 2001, p.32).
Operating Statement
A complete set of financial statements includes a third report called the Statement of
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description of how the organization’s net assets or operations have changed over time.
This change in net assets is expressed through the general equation: Revenues – Expenses
= Change in Net Assets (Keating, 1991, p.34). This change in net assets reflects either a
surplus or a deficit.
organization receives funds, or revenues it must then determine the intent of the donor,
permanently restricted funds (Olenick, A. & Olenick, P., 1991, p. 356-58). If a donor
imposes a restriction on the funds the use of the funds are limited. However, the donor
cannot ask for the return of the donation. An asset can be moved from the temporarily
restricted column if the restriction is removed. The asset can then be considered
unrestricted and an organization can use the funds appropriately. As indicated on the
operating statement below, $100,000 were released from the temporarily restricted fund
and moved to the unrestricted category. This change was recorded to indicate that the
money was placed in the correct fund and that the temporary restrictions had been met by
the organization. This allowed it to move the money to the unrestricted column.
Permanently restricted funds cannot be moved unless the time allotted for the funds expires
considered a liability until the condition is met as the donor requested. The money is
considered a liability because the donation can be rescinded until the condition is met by
the organization. It cannot record the donation as revenue until the condition or liability is
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eliminated. For example, as seen below, the organization will record the $30,000
permanently restricted funds as a liability on the balance sheet because the conditions of
Contributions are recorded at fair- market value when the gift is received. If
contributions are paid in installments, the nonprofit can record only the discounted amount
given, not the gross amount of the gift. The interest compounded over the length of the gift
payments, the organization can reduce the value of amount given by the anticipated
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defaults of payments. In-kind goods and services are not generally recorded on the
situations, but in-kind professional services can be recorded if the service increases or
Membership dues. These are fees or revenue that is generated from members of an
Special events revenue. This is revenue from special events (i.e. fundraising events)
that are recorded separately from contributions. A nonprofit should record the gross
revenue of the event and offset this amount by recording the costs associated under the line
Investment income. This is income earned from the investment portfolio. This
Program expenses. These are costs for the delivery of goods and services that are
Fundraising expenses. These are costs associated with publicizing and conducting
fundraising campaigns. These may include: maintaining donor mailing lists, conducting
special fund-raising events, preparing and distributing fund-raising manuals, and other
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Administrative expenses. These are costs associated with general and managerial
Budgets
period of time. Basic budgeting should be integrated into the organization’s programs and
service to determine planning steps, evaluation methods, pricing for services, timing of
events, and costs related to achieving the organization’s mission. Arnold and Philip
etc., by the estimated cost per unit of each such item. Normally, the staff that is
the most familiar with the details handles this process. A tentative expense
budget should then be submitted to the board for review and approval.
including the board best accomplish this. Sources may include: grants, fund
3. Expenses must be brought into line with reality. An organization must balance
4. The final proposed budget must then be reviewed and approved by the board
after fine-tuning.
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5. During the year the budget must be evaluated periodically to determine whether
projected and actual income and expenses are in line. If not, and if the variance
(amounts over or under budget) are substantial the budget must be updated and
Estimating revenues for an organization can begin with a general list of the most
common types of income. Dues, individual contributions, and investment income can be
determined by breaking down the total spent on each line per quarter. In estimating for the
upcoming year an organization should factor in the economic climate and the
organization’s anticipated programs. Projected revenue from fees and admissions can be
figured by reflecting on last year’s purchasing patterns. A nonprofit should review the
changes of price and activity in determining the projected revenue from fees and
admissions. As Arnold and Philip Olenick state: “The heart of budgetary control is
studying and investigating the cause of variances between budgeted figures and actual
income and expenses. Fundraising, grants, foundation and government support should be
restrictions for each contribution, and related expenses attendant to obtaining grants or
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ICA 2,700,000
ANYTOWN city govt. 1,300, 000
TOTAL GOVT GRANTS 4,075,000
In-kind contributions 50,000
TOTAL IN-KIND 50,000
Fundraising Events
Be-Humble Auction 200,000
Dance the Night Fundraiser 300,000
Board Fundraising
TOTAL FUNDRAISING 500,000
Revenues
Admission 750,000
Classroom/workshops 100,000
Store sales 75,000
TOTAL REVENUES 175,000
Membership
Superfriend 5,000
Silver Member 3,750
Bronze Member 48,750
Gold Member 11,250
Platinum Member 50,000
Diamond Club 500,000
Everlasting Circle 500,000
Founder's Circle 500,000
TOTAL MEMBERSHIP 1,618,750
An organization can estimate expenses by reviewing the planned activities for the
review the support services needed to implement activities program by program. This
estimate should include: number of individuals needed to carry out the program or activity;
the space and facilities needed to complete the work; costs associated with transportation,
mailings, advertising and other supplies. Finally, an organization can project how much
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and what kind of resources will be donated as in-kind contributions and other expenses that
Program Services
Classroom/workshops 100,000
Teachers salary 200,000
Travel 10,000
Telephone 5,000
Supplies 300,000
TOTAL PROGRAM 615,000
Support Services
Administrative salaries 1,000,000
Computers 200,000
Custodial services 100,000
Payroll fringe benefits 500,000
Travel 20,000
Legal 40,000
Telephone 20,000
Marketing 200,000
Occupancy 200,000
Misc. expenses 50,000
TOTAL SUPPORT 2,330,000
Store Expenses
Merchandise 50,000
Inventory software 5,000
Misc. expenses 1,000
TOTAL STORE 56,000
Fundraising
Special Events 250000
Printing 30,000
Postage 80,000
TOTAL FUNDRAISING 360,000
Building
Structure 4,000,000
Furniture/display materials 500,000
4,500,000
TOTAL BUILDING
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Collections
Care/Maintenance 100,000
Purchases 50,000
Collection/loan insurance 15,000
Security 15,000
TOTAL COLLECTIONS 180,000
Depreciation 89,000
TOTAL EXPENSES 8,130,000
Excess revenue over expenses 148,750
Excess expenses over revenue 0
The two previous budget examples provided in this paper have been based on
funding streams (revenues) and separate program costs (expenses). These are two ways an
organization can compile information for a budget. Other budgeting techniques are can
Flexible Budgeting
Flexible budgeting allows managers the ability to create operating budgets for
various workload le vels. Reviewing the volume of goods and services provided by the
organization suggests the workload of an organization. “If the volume of services, cost of
services, and revenues related to services all rose and fell in equal proportions, this might
not create a significant problem” (Finkler, 2002, p.67). Generally, this does not happen
within an organization and managers need to be able to predict what could happen if
dramatic changes occur with services, expenses, and revenues. A flexible budget provides
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Example of a Flexible Budget:
Flexible Budget for ABC Nonprofit 2004
Revenues*
Donations $100,000.00 $100,000.00 $ 100,000.00
Fees 52,500 60,000 67,500
Total Revenues $187,500.00 $200,000.00 $ 212,500.00
Expenses
Salaries $ 50,000.00 $ 50,000.00 $ 50,000.00
Supplies 70,000 77,000 84,000
Rent 12,000 12,000 12,000
Other 5,000 5.000 5,000
Total Expenses $137,000.00 $144,000.00 $ 151,000.00
Surplus/(Deficit) 50,500 56,000 661,500
*For example purposes only, other revenues streams likely in similar situations.
Performance budgeting requires the organization to define clear goals and then dedicates
resources to accomplish these goals. In addition, this method will allow the organization to
assess how well it planned to utilize its resources for an intended goal.
Often performance budgets are centered around cost centers. A cost center for an
determine the cost centers and the objectives that will accomplish the intended goals. After
cost centers are established, managers must then consider if the objectives are appropriate
for each cost center, what influence the objectives will have on an entire organization, and
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Example of a Performance Based Budget
Improve Staff Allow longer breaks Turnover rate Reduce turnover by $20,000 $10000 /staff
Satisfaction and free coffee/donuts 50% from 6 years member
To 3 years retained
Cost-Benefit Analysis
programs. Usually required by the government agencies cost benefit analyses can also be
used by small nonprofits for special occasions. For example, an organization may want to
analysis of purchasing the vehicle by going through a five-step process: determine the
project goals; determine the benefits of the purchase or program goals and determines
project costs; determine the cost and benefit flow at an appropriate rate; and make a
decision analysis based on the data collected. Organizations that utilize performance based
budget or flexible budget along with a cost-benefit analysis can gather more information
and, therefore, make a more informed decision. If the costs seem to high, or the costs
increase dramatically over a long period of time, the organization should decide whether
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Zero-based Budgeting
As Steven Finkler states, “Any items that do not add value or do not add sufficient value to
justify their cost should be eliminated from the budget” (p.75). Zero-based budgeting is a
time-consuming process and some organizations only use zero-based budgeting for new or
Forecasting
When an organization plans a budget it must estimate what the revenues and
expenses will be for a certain program and period of time. These predictions or forecasts
can be made from historical data or, if none exists, from similar information garnered from
The basic premise on which to base budgeting revenues and expenses is a well- laid
out plan for the next year. If an organization delivers multiple programs, the staff and board
must determine the viability of each program and the revenues and costs associated with
each. Variances between the actual and the projected budgets that appear throughout the
next year’s budget before the current year has ended, it can closely monitor the growth and
Conclusion
analysis is by carefully and thoroughly reading the financial statements and the
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accompanying notes” (p.443). There are three predominant themes that should emerge
during the review of statements. First, the organization should determine whether the
financial management of the organization’s finances is meeting the intended mission of the
organization. Second, the analysis should determine the financial stability of the
organization and compare this to overall trends in the nonprofit sector. Third, the financial
statements should show results of the business activity by the organization. These results
should be compared to the intended goals and objectives for the period and time and
examine the financial statements and records of a nonprofit organization. After an audit is
complete the CPA will attach an auditor’s opinion letter indicating that the financial
statements have been reviewed and that a certain level of compliance with GAAP
principles has been achieved. An auditor can also aid an organization in reconciling its
books but if severe financial errors are found the management team will be held
This paper has provided the basic framework of gathering together information for
the balance sheet, operating statement and cash flow statement. It has also reviewed
information on budgeting that will enable an organization to project what expenses and
revenues may be incurred for a given period of time. Such information can form a more
complete picture of the organization’s financial position. Whatever the steps, a thorough
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Glossary of Terms
decisions.
Accounting cycle The total set of accounting procedures that must be carried out
Accounts payable The money that a business owes to its trade creditors. This
Accounts receivable The money that is owed to a business by its customers. This
Accounting the tax year earned, whether or not received, and deductions are
Adjusting entry An entry made before finalizing the books for the period to
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Asset Anything owned that has a dollar value.
Balance Sheet A statement showing the financial position (the assets, liabilities,
a certain date.
Bank reconciliation A routine procedure to find out the reasons for a discrepancy
accounting cycle.
Capital The difference between the total assets and total liabilities plus
Chart of accounts A list of the accounts of a business and their numbers, arranged
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Cost of goods sold The total cost of goods sold during an accounting period.
Current assets Unrestricted cash, an asset that will be converted into cash
within one year, or an asset that will be used up within one year.
Depreciation The decrease in value of a fixed asset over time. For accounting
mathematical formula.
42
requirements for the basic information that must be presented
Fiscal Period The period of time over which earnings are measured.
General ledger A book or file containing all the accounts of the business other
company.
goods or services.
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Income Statement Total incomes and total expenses incurred during a specific
disk.
Net worth The difference between the total assets and total liabilities of a
business.
Prepaid expense An expense, other than for inventory, with benefits that extend
Retained Earnings The capital that comes from company profits which has not yet
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Source document A business paper, such as an invoice, that is the original record
Trial balance A special listing of all the account balances in a ledger, the
Working capital The difference between the current assets and the current
liabilities of a business.
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